Christine Lagarde: The Cut in U.S. GDP Growth Forecast is Not a Sign for a Downward Spiral

Following the today’s press conference of the head of the International Monetary Fund, Christine Lagarde, she was invited to Bloomberg Television, where in an interview with Tom Keene, the Managing Director of the IMF discussed the announcement regarding the IMF’s cut for U.S. growth forecast for 2014, the U.S. economy and its implications on a global scale. As you know, the IMF today announced that it has reduced the forecast for the U.S. GDP growth to 2.0%, from the previous 2.8%.

Christine Lagarde

Madame Lagarde emphasized that even though the numbers for the current year have been revised down, the IMF still considers that in 2015, the GDP growth will amount to 3%. The growth trend has been revised on an ongoing basis from the average in the last 50 years, and also on the basis of the aging of population and lower productivity, she added.

Mr. Keene asked whether there is a probability that the IMF has been wrong with its forecast and the U.S. will have a better growth rate. The director of the IMF stated that forecasting is not an exact science and some of the key numbers are very uncertain.

“There is uncertainty.  Let’s face it, whether you look at unemployment, whether you look at employment, whether you analyze the participation rate — all of that is not rocket science, maybe, but it’s not — that’s clearly explainable for some of those numbers,” Madame Lagarde added.

Another factor that has to be taken into account is the inflation, which lately has been moving “upward rather than downward.” This is why, the Fed should be active and communicative in order to explain the uncertainty. Madame Lagarde also pointed out that the Fed should explain what is going on, because otherwise markets have to operate on the basis of uncertainty “that they seem to enjoy.”

Regarding the U.S. minimum wages, which is another point made by the IMF, the Managing Director of the IMF said that it is important in order to help those Americans who live below the poverty line. She also stated that the IMF recommends an increase in the Earned Income Tax Credit (EITC).

“That [EITC], together with an increase of the minimum wage, we believe would be very helpful to kickstart growth and give a little bit of demand support that would not be fueled by taxpayers’ money.”

Madame Lagarde also said during the interview that the IMF likes the current moves in the monetary policy and that tapering is being conducted in a gradual and well communicated way, which was also recommended by the IMF.

“And we are quite confident that as employment numbers firm up and unemployment goes down, provided that inflation remains in check, she continues together with the board to conclude the tapering and gradually over time move into tightening.”

The full interview on Bloomberg Television can be watched below:

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